In a leader and accompanying article in our issue of May 23rd, we argued that America’s Justice Department was right to bring an antitrust case against Microsoft. We asked Bill Gates to respond, and this is his reply:

AS A long-time admirer of The Economist’s stance on business and economics, I have been surprised by your recent coverage of Microsoft, and welcome this chance to set out some of the facts about our disagreement with the Justice Department.

In less than two decades, America’s software industry-indeed, the entire PC industry-has become the most vibrant, innovative and competitive industry in the world. Without government regulators restricting or managing its creativity, it has grown to generate one-quarter of America’s real economic growth and 8% of its national output. One element of this success is the availability of a software platform that runs on all PCs, with a common interface and numerous applications. Microsoft’s Windows operating system is the most popular software platform today precisely because of its openness to developers.

Consumers, too, tell us they value our open software standard and the hugely beneficial effect it has had on the cost of computing, which has fallen by a factor of 10m since the microprocessor was invented in the early 1970s. They tell us they appreciate the fact that, thanks to the common Windows interface, they can choose from thousands of makes and models of PC, yet will always know how to use the one they opt for. And thanks to the common Windows programming environment, consumers know that virtually any PC from any manufacturer will run literally thousands of applications.

Consumers also tell us they want PC operating systems to be steadily improved with new features and functions-not an ever-increasing tangle of separate products, each with its own installation requirements, special commands and price tag.

Our development and widespread licensing of Windows have also contributed significantly to the astonishing growth of the software industry around the world. From a standing start a decade ago, the ranks of independent developers designing software for Windows have swelled to 2.2m in America, and 5m worldwide. Since 1995 alone, the PC-software industry has created 162,000 new jobs in Western Europe, and now contributes more than $15 billion a year in tax revenue for European governments.

Founded on open standards

In the American computer-services industry, more than 300,000 people work in jobs related to Microsoft software, making up an industry with $40 billion in annual revenues. There are more than twice as many opportunities for Windows-based computer-services careers in America than there are for jobs focused on the combined proprietary technologies of IBM, Novell, Oracle and Unix. Open standards are what create jobs-not regulation or the old, vertically integrated computer-industry model our competitors seek to resurrect. Open standards are the reason why PC sales have soared (see chart 1 on next page).

The current popularity of Windows does not mean that its market position is unassailable. The potential financial reward for building the “next Windows” is so great that there will never be a shortage of new technologies seeking to challenge it. Powerful competitors such as IBM, Sun Microsystems and Oracle are spending hundreds of millions of dollars annually to develop new software aimed squarely at replacing Windows. That is one reason why we price Windows so low. If we increased prices, failed to innovate, or stopped incorporating the features consumers want (such as support for the Internet), we would rapidly lose market share.

It is often argued that Microsoft should be deemed a regulated “essential facility”. This too is weak. Essential-facility law primarily applies to a physical asset or facility (such as a bridge) that a company (or companies) denies to competitors, and which cannot be duplicated by those rivals. By contrast, Windows is a piece of intellectual property whose “facilities” are totally open to partners and competitors alike. Windows’ programming interfaces are published free of charge, so millions of independent software developers can make use of its built-in facilities (eg, the user interface) in the applications they design. Those same interfaces are also provided freely to manufacturers of computer peripherals, who take similar advantage of them. And we license Windows cheaply to any PC maker that wants to use it, a strategy which has allowed computer makers such as Compaq and Dell to focus on improving their products.

Windows became a de facto standard because from the outset we adopted a low-price, high-volume business model. Your assertion that “the cost of a retail upgrade of Windows has more than doubled since 1990” is misleading: prior to Windows 95, PC buyers needed both DOS and Windows if they wanted a graphical user interface. The cost of upgrading that DOS/Windows operating system in 1990 was, at the street prices most consumers pay, much the same as today’s $89 pre-order street price of a Windows 98 upgrade. This relatively stable pricing during the 1990s is in line with rival operating systems, and a fraction of the cost of Unix-based operating systems such as Sun’s Solaris.

Moreover, consumers clearly think the price/value proposition of a Windows upgrade is excellent. Millions have bought upgrades, even though their PCs would continue to operate perfectly with their original operating system.

It just gets better

While its price has remained relatively stable, the number of features in Windows-and its benefits to consumers and software developers-has increased dramatically, a result of our enormous investment in R &amp; D. Windows 98 includes a new Web-like user interface, a more efficient file system, faster launching of applications, multiple-monitor support, faster 3D graphics, easier connection to peripherals (such as digital cameras) and more-all for the same low price as Windows 95. And as our Web-browsing technology was integrated into Windows 95 nearly three years ago, the launch of Windows 98 has no bearing on our competitiveness with Netscape’s Navigator browser-except that Windows 98 and its integrated Web-browsing features are better than ever, and consumers are likely to respond positively to that. (Netscape’s browser runs even better on Windows 98 than on Windows 95, too.)

On any measure Windows remains a bargain. For consumers paying street prices for an upgrade, the cost of using Windows 98 over three years (a conservative lifespan) will be a mere eight cents a day-cheaper than The Economist’s current special offer here in America (see chart 2). For consumers who get Windows with a new PC, the cost is less than five cents a day. If you purchased separate software products to upgrade, say, Windows 3.0 to get the functionality provided by Windows 98, it would cost at least $400.

Ironically, the government’s lawsuit on behalf of Netscape is attacking one of the fundamental principles that has fuelled the rapid improvement in PCs-that every company should be free to innovate and continuously improve its products on behalf of consumers, adding new features and functionality. The regulators’ case centres on the claim that we integrated our Internet Explorer browsing technology into Windows in an attempt, in your words, “illegally to counter Netscape’s Navigator browser”. The central flaw in this allegation is that there are absolutely no laws against innovating. In fact, the law says that every company-from the smallest start-up to the largest multinational-should always work to improve its products for consumers.

Contrary to the government’s central accusation, Microsoft planned the integration of Internet technology into Windows well before Netscape was even formed, and long before it shipped its first browser in October 1994. Many Microsoft emails and memos from 1993 and early 1994 reflect this strategy.

For example, on December 7th 1993, Steve Ballmer, Microsoft’s executive vice president for sales and support, sent email suggesting that it “could really help popularise” the forthcoming Windows 95 if the operating system could be positioned as “the greatest front-end to the Internet”. In an email dated December 16th 1993, a Microsoft technologist noted that “Internet connectivity . . . should be an integral part of the operating system,” adding that “customers will love us for providing these facilities.” And in speeches made in early 1994-which were reported in the press-I too talked extensively about our plans to integrate Internet access into Windows 95.

Free to choose

The fact that our browser was integrated into Windows 95 from the outset did not in any way prevent consumers from choosing another browser. Windows users hardly flocked to use the early versions of Internet Explorer, and its first reviews were rather embarrassing. In August 1995 Time called version 1.0 “somewhat clunky”, while the Wall Street Journal’s verdict on version 2.0 in January 1996 was that “the clear victor today is Netscape Navigator.” But in the past nine months, our browsing technology has won 19 out of 20 head-to-head reviews against Netscape’s, which is why we have seen more and more consumers using it. Fortune, for example, wrote that version 4.0 of Internet Explorer “beats Navigator hands down.” I am very proud of the work our development teams have done to make it easy for Windows users to access the Internet-and we have many more improvements in the pipeline.

The regulators are trying to tell the court that Windows 98 is not one product, but two-an operating system and a separate Web browser-and that the former would work fine without the latter. This just isn’t true. Windows 98 was designed from the ground up as a single product that performs a variety of functions, including Web browsing. If the software that provides Web-browsing functionality were removed from Windows 98, the operating system would fail to function in many ways.

As you observe, the government claims that Microsoft “tried to push Netscape into colluding with it” to carve up the browser market illegally during a meeting with Netscape in May 1995. The facts do not support this claim. The meeting the government seems to be referring to actually took place in June 1995, not May, and its purpose was to discuss various technologies Microsoft proposed sharing with Netscape, so that Netscape’s browser could take advantage of the cool new features we were developing for Windows 95. Email sent by Marc Andreessen, one of Netscape’s founders, makes this clear, as do an agenda printed on Netscape stationery and handwritten notes taken by one of the people attending the meeting.

Shortly after the meeting, Mr Andreessen sent email to a Microsoft attendee enthusing, “Good to see you again today-we should talk more often,” an odd sentiment given his supposed indignation over the meeting. And on August 24th 1995 Netscape was a featured applications developer at the Windows 95 launch event at the Microsoft campus-again, hardly consistent with the government’s claim that Microsoft threatened to withhold information about Windows 95 from Netscape.

Trial by snippet

When you consider that Microsoft has co-operated fully with the government’s investigation, and provided over a million pages of internal documents and emails, it is not surprising that the government has been able to find a handful of statements-many by relatively junior staffers-that can be taken out of context to paint a misleading picture. Once all the facts are on the table, however, we believe these misleading snippets, and the government’s entire case, will be seen in a very different light.

You also refer to Microsoft’s “control over the PC desktop”, and suggest that the regulators’ demand that we give it up is reasonable. We have made incredible investments in the Windows user interface, and when consumers buy a Windows PC this is what they expect to see. Eliminating the interface would be a step back to the old computer industry, where each machine had a unique interface and was incompatible with other computers.

PC makers already have many ways to customise the screen. They can use the open space on the Windows desktop-about 85% of the screen-to display their own branded content. They can include our competitors’ software and display their icons prominently. And they can, and do, install Netscape’s browser and display it “on equal terms” on the desktop-they can even make it the default browser before the PC leaves the factory. PC makers can also create their own channel on the Channel Bar, and partner with content providers to create numerous sub-channels. And consumers, with a few clicks of a mouse, can change all of the above. It is they, not Microsoft, who ultimately control the PC desktop.

Even though Netscape’s browser is at most a few mouse-clicks away, the Justice Department also wants, as you note, “to make non-Microsoft browsers more available to consumers” by forcing Microsoft to include Netscape’s Navigator-which the Justice Department positions as a competitor to Windows-in Windows. We have invested hundreds of millions of dollars developing and promoting Windows. We should not be forced to link Windows to software made by a competitor, whose quality we could not vouch for. It is also worth asking why Netscape, whose browser has the highest market share, should get special treatment. After all, hundreds of other software vendors offer products that compete with parts of Windows.

This goes to the heart of Microsoft’s disagreement with the Justice Department: we are defending the legal right of every company to decide which features go into its own products.

The integration of innovative new ideas and products has been the path taken by almost every industry, from the auto business (which for a century has integrated new features that were once deemed “accessories”) to consumer electronics (where audio, TV and movie technology are merging into all-in-one home-theatre systems). All modern computer operating systems include integrated Web browsing. And Netscape, as part of its strategy to make its browser an alternative operating system, is integrating numerous new features that are also offered separately from other software companies.

America’s antitrust laws do not provide any basis for government regulators to attempt to design software products. Only last month, in a ruling granting Microsoft’s motion for a stay of the preliminary injunction issued last December insofar as it applied to Windows 98, the Appeals Court stated that “the United States presented no evidence suggesting that Windows 98 was not an `integrated product’ ,” as defined by the consent decree, and that, under these circumstances, any interpretation of the consent decree that would bar the distribution of Windows 98 would “put judges and juries in the unwelcome position of designing computers.”

What the people want

In the end, it all comes back to consumers. It is they who have benefited most from the open standards that have marked the personal-computer age. And it is they who would be harmed most if the computer industry were forced to return to the high-cost, fragmented standards that marked the age of the mainframe. Consumers tell us they want more innovation and real choice-not less innovation and choice restricted by regulators. It is free and fierce competition in the computer industry that has created innovation and choice-and consumers will continue to benefit only as long as this vibrant industry remains unfettered. It is consumers who have convinced us we are doing the right thing.